The interest rate is expected to remain at 2.25% in 2026, but if it does make a move, economists say it would likely be a hike.
Most of the country's major banks agree that the central bank will enter the new year expecting to see how past rate cuts will impact the economy, especially with some noisy data on the horizon.
“There will be a lot of distortion over the next few years.
“They're just trying to separate the signal from the noise… but they're also tracking jobs and GDP.”
In making his final rate decision of the year, the Governor of the Bank of Canada
said the policy rate was “about the right level” to keep inflation at around two percent and support the economy through the period of structural adjustment caused by
with the United States.
In a forecast released in October, the bank said it expects the Canadian economy to grow 1.2 percent in 2025 and 1.1 percent in 2026. The bank also expects the headline consumer price index to be 2.2 percent by the end of 2026 and 2.1 percent by the fourth quarter of 2027, with core inflation returning to near the target level of 2.1 percent by the end of 2027.
Royal Bank of Canada senior economist Claire Fan said that while the Canadian consumer showed some resilience in 2025, business investment continues to struggle and that trend is expected to continue into 2026.
“As we talk a lot about the impact on trade, actually cyclically, we think it impacts exporters and manufacturers, which they certainly do,” she said.
“But I think investing in businesses is one way that will probably have a long-term impact on the Canadian economy, because if businesses don't invest now, they won't be able to grow very quickly in the coming decades.”
The unemployment rate also fell in November to 6.5 percent from a peak of 7.1 percent in September, and the Canadian economy added 181,000 jobs this fall. But most of these new jobs were part-time.
“I don't think things have improved as much as the early numbers look because these are mostly part-time jobs,” said former Bank of Canada deputy governor Paul Beaudry, now a professor at the University of British Columbia.
Beaudry added that the best indicator of weakness or health in the labor market is the total number of hours worked, which he said has declined.
However, downside risks to the Canadian economy remain, including uncertainty surrounding the renegotiation of the Canada-United States-Mexico Agreement (
) in the summer of 2026. Currently, most Canadian goods are exempt from the 35 percent U.S. tariff because they comply with CUSMA, and any changes to the trade agreement could cause a chill in the economy. In the meantime, industry tariffs remain in place for Canada's forestry, auto, steel and aluminum industries.
Population growth has also slowed, which will continue to be a constraint.
“In 2026, population growth will almost disappear, so this is one of the key obstacles that will really hurt aggregate demand,” Fan said. “Beyond that, we still aren’t getting much from productivity growth.”
There is no consensus on when the central bank might start raising rates.
Notably, Toronto-Dominion Bank, Canadian Imperial Bank of Commerce, Bank of Montreal, RBC and Desjardins expect the central bank to keep rates at their levels through 2026.
But bond markets have increased bets on a rate hike in the second half of 2026, with the Bank of Nova Scotia and National Bank of Canada also forecasting a 50 basis point overnight rate hike by year-end.
Most economists remain skeptical, given the risks of economic contraction caused by tariffs and being in the US policy easing cycle.
“I just don’t see it,” Beaudry said. “Especially with the U.S. going into a contraction cycle next year, the idea that we'll raise rates when the U.S. cuts rates, and the fact that we have inflation around two percent and high unemployment.”
Looking to 2027, RBC and Desjardins expect the Bank of Canada to raise its policy rate by 100 basis points, bringing it to 3.25 percent by the fourth quarter.
Jean said he expects the bank to raise rates in 2027 as fiscal stimulus begins to have a more tangible impact on economic growth.
“We also anticipate a fairly favorable outcome from the CUSMA review process, although we acknowledge the high degree of uncertainty,” he said. “As the growth picture strengthens, the Bank of Canada will likely interpret the risks associated with the inflation target as balanced, justifying a return to a more decisively neutral stance.”
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